CPI & Retail Sales

Gas_chart
The rollicking response to Friday’s
PPI data makes today’s Consumer Price Index especially significant.

Last week, we learned food prices rose 7.7% year over year, while energy prices gained 3.4%. Gasoline prices are now above where they were post-Katrina, averaging over $3 across the country. And the Summer driving season doesn’t begin for another two weeks. 

On Friday, markets focused on the core rate — it was flat, mostly due to an unexpected drop in prescription drug prices, and
a not unexpected
drop in both car and truck prices.

Inflation in the pipeline remains
robust as intermediate goods
(that is ex food and fuel) rose .8% — the biggest gain since last
year.

Paul Kasriel observes that "inflation-
adjusted retail sales fell in both March and April.
"  Kasriel deflates
nominal retail sales by the consumer price index for
commodities to determine real sales volume, rather than merely measure inflation driven price increases.  "Revised March nominal retail sales increased 0.97%. The CPI for commodities increased 1.22% in March,” which means real sales fell. April’s nominal decline of 0.2% will translate into
a decline in inflation-adjusted retail sales as well. "Although two consecutive months of contracting real
retail sales is not the rarest event, in conjunction with
falling house prices, I would conclude that it’s not good,”

Kasriel says.         

That’s why today’s CPI data is worth scrutining closely. Not only will we find out the extent that inflation is being
passed along to consumers — we will also get a clearer read on Retail. How much are sales increasing? Are monthly sales data reflecting prices going up? The answer to these questions are significant to investors; look at Home Depot  (profits fell 30%) and WalMart (Q2
earnings may miss analysts’ expectations) — their disappointments will be weighing on the market this morning.

~~~

Concensus is for CPI to rise 0.5%. Core CPI (aka inflation ex-inflation) is expected to climb ~0.2%.

>

Sources:
Weekly U.S. Retail Gasoline Prices
Regular Grade Dollars per gallon, including all taxes   
Energy Information Administration
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html

Easter Bonnets Turn Retail Sales Inside Out
Caroline Baum
Bloomberg, May 15 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=aUDWhr0boLwo&

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What's been said:

Discussions found on the web:
  1. Peter commented on May 15

    While a pullback in overseas stk markets, particularly in China (down 3.6%), was the catalyst for the initial softness in the S&Ps this morning, it was the lackluster earnings from the 2 biggest retailers in the US, WMT and HD, that sent them to the lows.

    Apr CPI is expected up .5% and .2% core. While the mkts continue to focus on just the core, Apr would be the 4th out of the last 5th month with headline inflation .4% or more as food has joined energy prices in the upward trend.

  2. Lauriston commented on May 15

    We already know that 50% of the S&P500 profits come from overseas, so US inflation data should not be taken too seriously especially by traders- you need to look at the US markets with a global perspective… there is money flowing in from overseas buying up every bargain (pullback) in US markets which are probably the least “overvalued”. Try and compare US to Chinese valuations for example…

  3. Winston Munn commented on May 15

    It would be nice if Congress passed legislation to disconnect COLA from the BLS figures – perhaps tie COLA to denture cream prices or costs of fiber drinks – then BLS might publish a real inflation rate and not the geometrically wieghted and subsitutionally reduced inflation nonsense we are fed.

  4. Winston Munn commented on May 15

    Quote Lauriston: “50% of the S&P500 profits come from overseas”

    Without an absolute dollar commodity standard, and with Congress rumbling about trade restrictions and manipulated currencies, should these profits be considered revenue or one-time gains?

  5. Jay Weinstein commented on May 15

    It is my firm belief that the inflation from 2002-2005 was systematically omitted from the government statistics, nor will it ever show up.

    However, you cannot systematically omit inflation from a consumer’s checking account or credit card bill. While the capital markets will continue to feast on artificially cheap money, the average Joe/Jane doesn’t have that luxury.

    Ultimately, this asset bubble will burst as well.

    One interesting historical reminder—most people forget that while NASDAQ peaked in March 2000, the S&P 500 Total Return index actually hit a new high in the late summer as people fled tech stocks to buy the unsinkables like GE and Big Pharma. Ultimately, that burst as well.

    So be wary of the record Dow headlines—

  6. Winston Munn commented on May 15

    This nonsense grows truly laughable – M3 is growing at an annualized 12.8% while the GDP is growing at less the 1% but there is still no significant inflation worry.

    And the markets react to the non-news news like a Pavlovian hound, salivating at the sound of the bell.

    Fantasy is supposed to be an escape, not a daily staple; at some point it is required to turn attention back to the textbooks.

    Methinks when test day comes, this market will flunk big time.

  7. js commented on May 15

    As much respect I have for Paul Kasriel and his team, I still think that focusing on the lower CPI ex food&energy and even CPI ex food, energy and housing does not make sense, especially if you turn around and start deflating consumption by the higher full CPI measure (which NOrthern Trust routinely does). Twisting the stats to fit their story a little bit. They have a good story to tell without playing games with the numbers.

  8. Fred commented on May 15

    Welcome back Goldilocks. Your health has been questioned around here. Many think you’ve only survived by some sort of “bubblewrap” protection. I think they fail to see you as an economy that is undergoing a few important changes. They say the light from the tunnel spells danger…you’ve proven them wrong. The flat global economy will be in growth mode for a while, and your nemesis – Inflation – has been tamed by productivity, innovation, and new technologies. Don’t mind all the name calling, and gringing of teeth from the bears…

  9. Patu commented on May 15

    “This nonsense grows truly laughable – M3 is growing at an annualized 12.8% while the GDP is growing at less the 1% but there is still no significant inflation worry.”

    the fed and every other reserve bank is flooding the world with money because they fear the collaspe of the housing and credit bubble. They learned from greenspan that the only way out is to monetize the problem away. Not only does it solve the housing crisis but it monetizes SS and medicare obligations as well as the US debt. whose holding the bag? the chinese, japs and opec countries that are holding the most US treasuries. Let the foreigners pay by the depreciation of their assets. Whats not to like?

  10. Estragon commented on May 15

    Fred – You’re correct that this is “as an economy that is undergoing a few important changes”.

    One of the important changes is the structural dependency on the creation of debt for export. Ironically, if inflation is tamed and global growth will remain strong as you suggest, it may be that the US faces increasing competition in the debt for export business.

    That, in my view, is when Goldilocks will acquaint herself with the true nature of the light at the end of the tunnel.

  11. KP commented on May 15

    I agree with Estragon. Everytime the bubble is passed it gets a little bigger, it doesn’t go away. All of that accumulation will find a home or many homes. I see no reason why we should be exempt from that. The only thing in question here is when NOT if. Good cases for the near and longer term can be made, and any gains from now until then will more than likely be deflated away anyhow. I can’t find much sense in continuing to take ever increasing risks for ever decreasing returns.

  12. michael Schumacher commented on May 15

    None of this matters…..It has’nt for a year…discussing it is great but how do you make any money when the statistics that trillions of dollars are put to work from are wrong and continue to be manipulated to serve the current administrations agenda? M3 at 13%? I think that is low balled as well…more like 15-18% and getting bigger.

    Cashed out and went fishing so to speak in early April……I have time to wait this nonsense out.

    Ask yourself one question: with the rest of the CB’s raising interest rates why are we the ONLY CB to even mention a rate cut?? Pandering to the institution that has control of our market that’s why.

    Ciao
    MS

  13. Fred commented on May 15

    Estra…exports are being fueled by millions of new consumers. The dollar has finally come back to the “correct” level (the level before those now healthy economies’ currencies imploded). This round trip in the greenback now makes our exports (finally) competitive.

    The death spiral of the dollar, and a subsequent crushing of the treasury market has been the hail mary pass for the bears. I think the clock already ran out on that play.

    Think PAIRITY.

    It’s amazing that the strength of global economies gets such littel respect.

  14. Greg0658 commented on May 15

    Patu – don’t be so cocky – if you haven’t noticed those countries are major suppliers of mined and manufactured goods to America.

  15. michael Schumacher commented on May 15

    >>It’s amazing that the strength of global economies gets such littel respect.>>

    Relative to what??? There is no skill or respect due when said economies are manipulated to achieve a desired result.

    Puppets and stew meat deserve more respect than a bloated economy that is fueled by purchasing our debt and then placed back in our economy as treasuries.

    Anyobe else notice that the days between PPI and CPI are getting longer now? Not a coincidence either..

    Ciao
    MS

  16. Winston Munn commented on May 15

    $22B in treasury settlements hitting the markets today, and it looks like the Fed isn’t going to use the reverse repo to pull much out…

    Party on, Ben
    Party on, Wayne

  17. Fred commented on May 15

    …on strength in global economies:

    “Relative to what??? There is no skill or respect due when said economies are manipulated to achieve a desired result.”

    So all the emerging economies have “manipulated” their way to s healthier economic state?
    Wow…let’s spin some Kinks! “PARANOIA WILL DESTROYA!”

  18. SPECTRE of Deflation commented on May 15

    This nonsense grows truly laughable – M3 is growing at an annualized 12.8% while the GDP is growing at less the 1% but there is still no significant inflation worry.

    And the markets react to the non-news news like a Pavlovian hound, salivating at the sound of the bell.

    Fantasy is supposed to be an escape, not a daily staple; at some point it is required to turn attention back to the textbooks.

    Methinks when test day comes, this market will flunk big time.

    Posted by: Winston Munn | May 15, 2007 9:00:42 AM

    When…when…when? You say that the market will one day go down. Meanwhile if you are short, you are having your head handed to you. This “one day” nonsense is why Bears go broke. Simply trade the trend until it isn’t a trend anymore.

  19. Michael C. commented on May 15

    S&P hits new high after slightly better than expected CPI.

    God forbid we actually see an acceleration in the economy.

    Can the market make it any more clear?

    I…WANT…TO…GO…HIGHER!

  20. S commented on May 15

    Looks like the export savvy Chinese are going to attempt to export their stock market bubble:

    http://tinyurl.com/2q2e4c

  21. SPECTRE of Deflation commented on May 15

    This nonsense grows truly laughable – M3 is growing at an annualized 12.8% while the GDP is growing at less the 1% but there is still no significant inflation worry.

    And the markets react to the non-news news like a Pavlovian hound, salivating at the sound of the bell.

    Fantasy is supposed to be an escape, not a daily staple; at some point it is required to turn attention back to the textbooks.

    Methinks when test day comes, this market will flunk big time.

    Posted by: Winston Munn | May 15, 2007 9:00:42 AM

    When…when…when? You say that the market will one day go down. Meanwhile if you are short, you are having your head handed to you. This “one day” nonsense is why Bears go broke. Simply trade the trend until it isn’t a trend anymore.

  22. Greg0658 commented on May 15

    Fred – is there a website that points out what types of products that are manufactured inside Americas shores and exported abroad?

    I’m gonna guess (alphabetical) audio/visual products, classic automobiles, drugs, guns (small & big), invent chips and devices they go into, medical diagnostic equipment, plastics and mastics, security & terror detection equipment.

  23. michael Schumacher commented on May 15

    fred-

    It very much depends on a definition of “healthier economic states” which I’m sure you are aware of.

    I don’t consider what we have here as healthy when most economic indicators are at recessionary (or lower) levels.

    It’s not paranoia it’s reality….only people choose what to focus on (only positive news) and what to ignore (all the negative news). Which is completely ironic when you look at your answer (or attempt at one)

    Keep drinking that kool aid…..

    Ciao
    MS

  24. Fred commented on May 15

    Look at GE’s, or UTX’s website for a quick peek at our current export acumen.

  25. Estragon commented on May 15

    Greg0658 – US exports: Treasuries, GSE debt, CDO’s, CLO’s, CPDO’s, etc.

  26. michael Schumacher commented on May 15

    >>$22B in treasury settlements hitting the markets today, and it looks like the Fed isn’t going to use the reverse repo to pull much out…>>

    What time did our market suddently take off?

    What time did the “auction” (I still chuckle at that definition) close?

    Not rocket science but I suppose it will be explained as “healthy”

    Sheep
    Ciao
    MS

  27. Michael C. commented on May 15

    Looks like the export savvy Chinese are going to attempt to export their stock market bubble.

    This was reponsible for the 600+ gap up opening of the HK market day before yesterday. Another article cited that the HK would be one of the primary benefiters because of the familiarity of that market to Chinese investors and because of its lower valuation than Chinese stocks.

  28. Fred commented on May 15

    Mt Chow:

    “It very much depends on a definition of “healthier economic states” which I’m sure you are aware of.”

    By ANY definition (especially those called MARKET PRICING) emerging economies have gotten healthy. Global economy doesn’t rely of the housing market in the US. Get it?

  29. V L commented on May 15

    CNBC just said that the inflation numbers were less than expected; therefore, it means the Fed will cut.

    They appear to be educated and intelligent talking heads; nevertheless, they make ridiculous and childish statements. It is either they have the hidden agenda or they are simply sick. (Sick in their heads)

    I do not know how else to explain these comments.

  30. Adam commented on May 15

    The story of the divergence between the Headline and Core CPI’s is interesting. Y/Y the Headline is up +2.6% and the Core +2.4%. However over the past 3 months the Headline is rising at a +5.7% annualized rate and is accelerating. Meanwhile the Core is up at a mere +1.9% rate over the same period and is decelerating.

    As I’ve discussed previously, the Core, which omits food and energy and is normally less volatile that the Headline, is a subject of attention because historically it has cut out a lot of “wiggle” in the data. But over the past few years, since Oil has trended higher (and more recently since food has done likewise) the disparity between the Headline and Core numbers has, in my view, taken on a different meaning. The difference between the Core and Headline numbers is not a function of variable wiggle anymore, but a function of a significant difference in trend. Core Goods are actually DEFLATING (on cheap imports from Asian countries, -0.5% Y/Y as well as 3-month annualized). Meanwhile non-durable food and energy prices are INFLATING rapidly, as are Core Services (+3.5% Y/Y).

    So, what’s going to drive the overall inflation picture? Asian Imports or Domestic Services along with Food and Energy? It’s not clear to me that the Core number is the better prognosticator of the underlying trend anymore. But time will tell.

  31. michael Schumacher commented on May 15

    whatever you say….Fred…..

    pointless trying to argue or discuss when the subject gets changed to support your comment.

    But I expected that…

    Ciao
    MS

  32. Estragon commented on May 15

    Adam – Interesting analysis. One other factor which MAY drive inflation is, oddly enough, housing.

    When house prices were escalating, housing costs were actually declining (cost being the cost of carry +/- terminal gains/losses). Now that costs (same definition) are increasing, I wonder if there will be any impact on wage demands, particularly among those with pricing power (eg. domestic services).

    Just a thought.

  33. Nova Law commented on May 15

    Fred’s right, as usual. And moreover, I ensured the continuing existence of the bull market by recently opening up a position in QID. You can send thank you checks in my honor to the Salvation Army.

  34. Greg0658 commented on May 15

    My favorite charity. Thank you.

    Funny tho, the new small business venture for outta work Americans, start a Non-For-Profit charity … further diluting effect.

  35. Fred commented on May 15

    Barry…not sure if you have mentioned Richard Russell of “Dow Theory Letters” change in market views. He has been a General in the negativity army for quite a while.

    Aaron Task does a nice job of highlighting his current stance on RM.

    Fascinating.

  36. wunsacon commented on May 15

    Patu, I’ve been thinking the same thing about the buyers of our treasuries. I do wonder when they’ll wise up. But, yes, we have no choice but to do what we’re doing. (Or cut spending. Or raise taxes. Probably both. But, the public dislikes those ideas. So…here we are.)

  37. wunsacon commented on May 15

    Patu, I’ve been thinking the same thing about the buyers of our treasuries. I do wonder when they’ll wise up. But, yes, we have no choice but to do what we’re doing. (Or cut spending. Or raise taxes. Probably both. But, the public dislikes those ideas. So…here we are.)

  38. wunsacon commented on May 15

    Oh no! The dreaded double post!

  39. dave commented on May 15

    Core inflation represents what we want while total inflation gives a picture of what we need. Even with the ‘deflating’ effects included in core inflation, both the core and over all are above the feds comfort zone. The deflation in some areas may be directly linked to the inflation in Food, energy and Insurance costs, which leaves less for discretionary purchases.

    Further, I think the reaction to this report will be of more concern to the fed than the report itself. The fed has commented on numerous occasions that one key to fighting inflation is to keep inflation expectations down. Calling this a benign report and good inflation news can not make the expectations game any easier. I can not see how, with inflation above the Fed’s stated “comfort Zone” there could be any possibility of a rate cut.

  40. cm commented on May 15

    Greg0658: Add airplanes, and various categories of industrial equipment.

    It’s not like the US doesn’t export anything, even though a good part of the inputs (materials/labor) are imnported from elsewhere.

  41. cm commented on May 15

    A 7.7% food price hike is consistent with my long-time unscientific estimate of 5-10% annually.

  42. DenverKen commented on May 15

    It’s really very simple.

    We’re in the midst of a liquidity driven market blowoff top. That’s ALL anyone needs to know for now.

    We can try to tie it to some piece of fundamental news, but fundamentals are NOT what is driving this. They are irrelevant for now.

    Where is the top? Dow 16k, 18k, 20k? No one knows. It’s amazing to watch, but impossible to rationally understand.

  43. Fred commented on May 15

    I’m sympathetic with the tempation of calling it a blow off top, but be careful in that description. We can also call it a reversion to the mean. The Naz crash, recession, 2 wars, energy spikes all lead to massive puking of capital at the Dust Tape Bottom, March ’03. Looking at a monthly logarithmic scale chart of the S&P going back to the ’70’s shows the market well below that trend line.

    Seperately, are the earnings in a “blow off top”? I don’t think so…and guidance does not support that as well…the demise of earnings has been called for the last 3 years!

  44. Estragon commented on May 15

    Fred – As long as you’re looking at really long term charts, have a look at long term debt yields. It sure looks to me like they’re putting in a bottom. The levered up US markets may not take well to a reversion to a more “normal” rate, say around 7.5 on the 10yr treasury.

    WRT earnings, they’re at or near historic peak levels relative to GDP. It’s possible they’ll continue to grow faster than nominal GDP, particularly if the dollar gets weaker, but the risks are growing.

  45. Winston Munn commented on May 15

    0.4 versus 0.5 does not justify the action so far today; $22B in free cash, however, does explain a lot.

    It is rather amazing to me the in depth analysys given to distored inflation numbers that are used to reduce COLA expenses and have no real bearing on much of anything else – unless the attempt is to quantify bare survival status for the unwashed masses.

    The Fed is impotent other than its ability to move markets short term, which is based more on speculative desire than reality.

    So much of the excess money supply is pouring into the markets that to truly gauge inflation it would be necessary to add the cost of owning equities.

    It looks more and more as if the only thing that will drain the excess liquidity is a major collapse or crisis.

  46. Fred commented on May 15

    Absolutely possible….butlower yields are a Global trend right now…again thanks to technology (Internet), productivity is just beginning in many countries.

    My (non-concensus)opinion is that both the dollar and interest rates volatility will compress for a while. Steady as she goes…

  47. Winston Munn commented on May 15

    I believe I have stumbled upon the answer to ensure a perpetually uptrending market – all we have to do is identify “core consumers” who neither eat nor use energy, who get annual raises of at least 3%, and who have the stamina to walk to the mall with credit card in hand. Then we can categorize retail sales ex-non-core-consumers.

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